Costa’s Cafe to Hire Extra Baristas Based on Demand

Case Type: improve profitability; math problem.
Consulting Firm: McKinsey & Company final round full time job interview.
Industry Coverage: restaurant & food service; small business.

Case Interview Question #00764: Costa’s Cafe is a small local coffee shop in the town of Hanover (with a population of 11,260 as of the 2010 census), New Hampshire. Costa’s Cafe serves only coffee and latte. This small coffee shop has been around for decades and is known for its high quality drinks and cozy atmosphere.

Historically, Costa’s Cafe has been very popular among the local people in Hanover and has enjoyed very healthy profitability. Recently, however, the cafe has seen declining profits over the last few quarters. The owner of Costa’s Cafe has hired you to help increase its profits. What would you do?

Additional Information: (to provided upon request)

Note that this is a typical McKinsey style interviewer led case with lots of tables and heavy math.

There are two other coffee shops in the nearby area that sell coffees and pastries. (There is no further information on these competitors.)

Costa’s Cafe currently serves only two items (coffee and latte) in three different cup sizes:

• Small: 8 oz
• Medium: 12 oz
• Large: 16 oz

Possible Answer:

If the candidate touches on prices or costs, ask him/her:

Question #1. How much profit does Costa’s Cafe currently make per customer? Show the two tables below. Assume that each customer only purchases one drink per visit.

Table 1. Products and Price

Table 2. Products and Cost

Possible Solution:

Table 3. Calculation of average profit per customer

Average Profit = 0.08 + 0.12 + 0.17 + 0.34 + 0.42 + 0.38 = $1.50 per customer

Strong candidates will point out that larger sizes yield larger profit margins, and suggest new profit increasing strategies like promoting sales of larger sizes, introducing a 20 oz size, eliminating 8 oz size, etc.

Question #2. What is the average profit that Costa’s Cafe earns per day?

Additional Information:

• Each customer purchases exactly one beverage.
• Two baristas are working at any given time. Baristas are paid $15/hour.
• Business hours: 7AM to 10PM, Monday through Friday. Closed on weekends.
• The number of customers per hour is listed below (Table 4). Customers leave if they can’t be served quickly.
• On average, it takes 2 minutes for a barista to complete an order. Coffee is served fairly quickly, while lattes take significantly longer to make. (The candidate should realize that only 60 customers can be served per hour by the 2 baristas.)

Table 4. Average Number of Customers per Hour

Possible Solution:

Assuming 2 baristas per hour, average profit is $607.50 per day (See below Table 5).

The candidate should realize that Costa’s Cafe is losing money in the evening hours (7PM – 10PM). A strong candidate should suggest adding or subtracting baristas based on demand.

Question #3. If you could change the number of baristas during each time period, what would be the daily profit for Costa’s Cafe?

Possible Solution:

By adding a third barista in the morning shifts and reducing one at night, the new profit would be $787.50 per day — see below Table 5.

Table 5. Profit Calculations

Question #4. Costa’s Cafe currently does not offer wireless access for its customers. Should the cafe add this new service?

Possible Answer:

Positives

• More customers
• Potentially charge customers for wireless service
• Customers may order larger sizes of drinks to stay longer in the cafe

Negatives

• Costs of wireless setup, outlets
• Sufficient room for customers
• Customers stay longer, slowing sales during busy periods
• Image of the cafe — may change current atmosphere

Question #5. (If candidate mentions that competitors sell pastries while Costa’s Cafe does not…) What factors should Costa’s Cafe consider before purchasing an oven to sell pastries?

Possible Answwer:

Revenues

• Doughnut sales, increased synergies with coffee/volume of customers.

Costs

• Fixed costs – purchasing/maintaining oven, setting up display case, storage, advertising.
• Variable costs – ingredients, hiring/training staff.

Capacity

• Room in cafe for oven and ingredients.
• Baristas available to accommodate for increase in demand.

Brand image — Costa’s Cafe is known for its coffee and atmosphere; adding pastries may change brand image and drive away loyal customers, especially if they are low quality.

Competition — price and quality compared to competitors.

Alternative opportunities — purchasing doughnuts from somewhere else.

Question #6. A new espresso machine, priced at $2000, can greatly decrease the time it takes to make a latte. The average time it takes to complete an average customer’s order decreases from 2 minutes to 90 seconds. How long would it take to pay back the $2000 espresso machine?

Possible Answer:

90 seconds per order would mean two baristas can now serve (60 min / 1.5 min) * 2 = 80 orders per hour.

Daily profit shown below in Table 6, calculated with the optimal number of baristas.

$2000 / ($922.50 — $787.50) = 14.8 days ~= 15 days

The new espresso machine would be paid back in 15 days .

4 Baristas in the 7-10AM would also yield similar profits with the advantage of turning away fewer customers.

Table 6. Profit Calculations with the new espresso machine